ISAs: new exemption for widows as well as raised limit

Wed 03 Dec 2014

Not only did the Chancellor increase the ISA limit from £15,000 to £15,240 from April 2015, he also announced that with immediate effect, if an ISA saver in a marriage or civil partnership dies, their spouse or civil partner will be able to inherit their ISA wrapper and keep the ISA tax advantages.

The Treasury estimates that 150,000 married ISA savers die each year and their ISA tax advantages die with them, even if they were saving as a couple.

In the Chancellor’s own words, “At the moment, when someone dies, the savings in their ISA lose their tax-free status and their spouse starts paying tax on that money. From today, I can announce that when someone dies, their husband or wife will be able to inherit their ISA and keep its tax-free status.”

Additionally, surviving spouses will be able to invest as much into their own ISA as their spouse used to have, on top of their usual allowance. However, there was no mention of excluding assets in ISAs from inheritance tax.

These new rules bring the death benefit of ISAs largely in to line with those announced previously in respect of pensions.

Typically, whilst an individual might invest into an ISA in their own name, the reality is that the source of the monies used to invest, generally comes from savings accumulated jointly between spouses. So, it always seemed unfair to withdraw the tax free status of ISAs upon death of one spouse. The new rules, which come into effect immediately are therefore very welcome and allow the tax advantages of married savers to be inherited by their surviving spouse or civil partner.

Coupled with the abolition of death taxes on pensions, savers now have the luxury of a number of tax free options upon death. This gives them greater choice and flexibility over how best to access their savings, take income and pass money on to their loved ones than ever before.

More than ever though, financial advice will be key in using the new rules most effectively.